What You Need to Know Before Filing Your 2021 Returns
Tax Season 2022 is officially here. The past couple of years have been filled with exceptions, complications, and adjustments to “the New Normal” in all parts of our lives due to the Pandemic—and taxes are no different! Tax laws are constantly changing, but the 2020 and 2021 tax years have been a whirlwind of changes with some of the pandemic relief tax provisions getting extended while others were not. Some of the most frequent questions I’ve received are related to some of those changes.
When can I file my return and when is the deadline?
The Internal Revenue Service started accepting 2021 tax returns for processing on January 24, 2022, and the deadline is April 18, 2022. There is an automatic six-month extension available, but you must file the extension by April 18th. It is important to note that, even if you file an extension, you still must pay all taxes that are due by April 18th. The penalty for not filing on time is much greater than the penalty for not paying on time, so I always advise getting your return filed—even if you can’t pay everything you owe!
What if I did not receive the third stimulus check (economic impact payment/EIP) in 2021?
If you did not receive the full amount of the third stimulus check, you may still be eligible to claim the 2021 Recovery Rebate Credit and must file a 2021 return, even if you do not owe taxes and wouldn’t normally file a return. This credit will then reduce any tax you may owe for 2021; or you’ll receive it with the remaining amount of any tax refund you are due. Note: If you did not receive the full amounts of the first or second stimulus checks, you may be eligible to claim the 2020 Recovery Rebate Credit and will need to file a 2020 tax return.
How do I calculate the 2021 Recovery Rebate Credit?
You must file a 2021 tax return and you will need to know the amount, if any, of the third stimulus check you received, as this will reduce the amount of the Recovery Rebate Credit (RRC). The IRS will not calculate the RRC for you or correct your entry if you enter $0 or leave the line blank for the credit. Therefore, the taxpayer must enter an amount of the credit on Line 30 of their Form 1040, and there is a Recovery Rebate Credit Worksheet included with the instructions to the Form 1040 that will help taxpayers figure the amount of their credit.
What if I don’t remember whether or not I received a third stimulus payment or how much it was?
The IRS is mailing Letter 6475 confirming the amount already paid, if any, of the Economic Impact Payment (EIP); or you can also log in to Your Online Account with the IRS.
Will my refund be more or less this year because of changes in the Child Tax Credit?
This is the question everyone seems to be asking right now, and the answer is a common one in the tax world: “It depends!” It may be less than in prior years because half of the total credit was paid as advance payments in 2021 and the other half is claimed as a credit when filing the 2021 return. The payment was increased from $2,000 in 2020 to $3,000 (or $3,600 for dependents under age six in 2021). So, half of that increased credit will be part of your refund this year, and it is still less than the prior year amount of $2,000.
However, there are other factors that further complicate calculating the credit, such as income limitations and phaseouts, that apply to the credit in two separate pieces:
• The first $2,000 of the credit starts getting reduced when modified AGI exceeds $400,000 for those married and filing jointly and $200,000 for all others.
• The remaining $1,000 – $1,600 starts getting reduced when modified AGI exceeds $150,000 for those married filing jointly and $75,000 for single filers.
But wait—there’s more!
Just because a taxpayer received the advance child tax credit payments doesn’t necessarily mean their refund will be smaller this year. Other credits such as the Dependent Care Credit were increased for 2021. This could increase the amount of your total refund. This credit was increased to a maximum credit of $4,000 for one dependent and $8,000 for two or more only for tax year 2021 (up from a maximum credit for 2020 of $1,050 or $2,100).
Also, for tax year 2021, the amount of the dependent care credit is potentially refundable. That means an eligible taxpayer can receive the credit even if they owe no federal income tax (in prior years this was a nonrefundable credit).
What if I don’t know the exact amount of the Advance Child Tax Credit I received in 2021—or if the amount I received was incorrect because the IRS used outdated information to determine the amount?
The IRS started sending letters in late December 2021 with the total amount of advance CTC payments sent in 2021. This amount will be used when preparing the 2021 return to claim any remaining amount of the refund.
One surprise that some taxpayers could be in for is that their total refund could be reduced (or they may owe the IRS) if they received advance payments but are no longer eligible for the credit due to income changes or dependency changes (like spouses who trade off claiming a child each year). Others may not have received the advance payments due to having a higher income in 2020 but will now qualify because of losing employment or having reduced income in 2021.
I am hearing a lot about IRS backlogs. What can I do to avoid delays in receiving my refund?
As of December, the IRS had a backlog of over six million unprocessed individual returns and millions of other types of returns, along with five million pieces of taxpayer correspondence, as recently reported to Congress by the National Taxpayer Advocate group. Many have been waiting up to nine months for last year’s refunds!
To avoid delays, the IRS recommends the following:
• File your return as early as possible (but make sure you have all of your year-end statements like W-2s and 1099s, so that your income is reported correctly and matches what has been reported to the IRS).
• File your return electronically. IRS Free File lets individuals prepare
and file their return online for free for most taxpayers with AGI of $73,000 or less. IRS Free File Online Options Using software will also help reduce errors, which can cause delays.
• If you are due a refund, the IRS recommends using direct deposit.
• The IRS reports that nine out of ten refunds are issued in less than
twenty-one days when taxpayers file electronically and use direct deposit. Note: the IRS cannot issue a refund involving the Earned Income Tax Credit or Additional Child Tax Credit before mid- February, even if the return is filed early.
Should I hire a tax professional to help with my taxes this year?
It really depends on how complicated your situation is and how comfortable you are with the tax laws. However, there have been so many recent changes and complications that my personal opinion is this is the year to seek out a great CPA to make sure you are not paying more than you are required. Using a CPA can help ensure you are getting every dollar of refund you are owed. Also, it has become increasingly difficult to get help from the IRS, as they have had a huge increase in calls due to pandemic-related relief and tax changes. They are simply unable to keep pace with the volume. Last year, the IRS received over 281 million calls and only 11% of those calls were answered. While our local CPA firms are busy, I assure you a much better answer rate if you call them. Many people are surprised with the affordability of a CPA who has the expertise to ensure that you are not paying more than what you owe!
by Jennifer Reynolds, MS, CPA
Lecturer of Accounting , Soules College of Business
The University of Texas at Tyler